Acquisitions Boost Steel Dynamics Sales, Earnings
07/23/2008 - Boosted by its recent acquisitions (The Techs, OmniSource, and Recycle South), Steel Dynamics reports net income of $210 million on net sales of $2.4 billion for the second quarter, and net income of $353 million on net sales of $4.3 billion for the first half of 2008.
Steel Dynamics, Inc. announced net income of $210 million on net sales of $2.4 billion for the second quarter, and net income of $353 million on net sales of $4.3 billion for the first half of 2008. Results benefited from the acquisitions of The Techs (July 2007), OmniSource Corp. (Oct. 2007), and Recycle South (June 2008).
Second Quarter Results—The $210-million ($1.05 per diluted share) net income reflects a 48% increase from net income of $143 million ($0.72 per diluted share) in the first quarter of 2008, and a 124% increase from net income of $94 million in the second quarter of 2007. The $2.4-billion net sales reflect a 26% increase compared to the first quarter of 2008, and a 164% increase compared to net sales of $911 million in the second quarter of 2007
Earnings from steel operations continued to improve as a result of strong shipments and higher selling values. Second quarter net steel shipments of 1.5 million tons were slightly stronger than the first quarter and, excluding The Techs, were 10% higher than second quarter 2007. The Flat Roll Division showed the largest increase, up 22% from the second quarter of 2007 and up 3% from the first quarter of 2008.
The steel scrap and scrap substitutes segment also provided a strong margin contribution. Demand for recycled ferrous scrap has remained strong, both from Steel Dynamics mills and from other minimills, integrated steel mills, and foundries. Compared to the first quarter of 2008, second-quarter ferrous shipments of 1.5 million net tons were up 8% and non-ferrous shipments of 254 million pounds were up 6%. OmniSource reported higher-than-expected earnings for the quarter, and Iron Dynamics continued to operate well, providing 51,000 tonnes of pig iron used as an alternative to higher-cost imported pig iron in the production of flat-roll steel.
During the second quarter, Steel Dynamics made a $15-million contribution to the Steel Dynamics Foundation, Inc., which reduced earnings per diluted share by approximately $0.04. The foundation will support local communities served by the company.
Six Month Results—Both net sales ($4.3 billion) and net income ($353 million) nearly matched full-year 2007 sales and net income of $4.4 billion and $395 million. Results benefited from the acquisitions of The Techs (July 2007), OmniSource Corp. (October 2007), and Recycle South (June 2008).
Management Comments—“SDI’s second-quarter results of $1.05 per diluted share exceeded our June 12 earnings guidance of $0.90 to $0.95 due to the stronger-than-anticipated performance by both our steel and metals recycling operations,” said Keith Busse, Chairman and CEO.
Operating Segment Results—Representing 56% of the company’s second-quarter net sales, the Steel Operations segment includes five steel mills and related steel processing facilities. Most of the steel products included in this segment are produced in SDI’s EAF-based minimills and processing facilities. The Techs galvanize steel sheet that is sourced primarily from third parties.
Second quarter 2008 Steel Operations shipments were 1.6 million tons on net sales of $1.6 billion. Based on tons shipped (including steel shipments made by The Techs), flat-rolled products accounted for 60% of second-quarter steel segment shipments, with the balance including structural steel shipments (18%), engineered bars (9%), merchant bars (8%), and shipments from the Steel of West Virginia subsidiary (5%). Operating income for the steel segment was $333 million ($206 per ton shipped), compared to $148 per ton in the first quarter. These figures exclude profit-sharing costs and amortization related to the segment’s intangible assets.
The second quarter’s average selling price per ton for Steel Operations was $1,011, an increase of $229 per ton from $782 in the first quarter of 2008 and an increase of $315 from the year-ago quarter. Compared to the first quarter of 2008, the strongest increases in selling values were in flat-rolled steel products. The average scrap cost per net ton charged increased by $144 compared to the first quarter, and was $181 higher than in the second quarter of 2007.
The company’s Scrap and Scrap Substitute Operations segment includes ferrous and non-ferrous metals processing and trading by OmniSource Corp. and SDI’s Iron Dynamics scrap-substitute operation, which produces pig iron for use by the Flat Roll Division. The segment also includes expenses related to the Mesabi Nugget project, which is currently under construction.
This segment’s net sales for second quarter 2008 were $1.2 billion, representing 40% of SDI’s second-quarter net sales. Operating income for this segment was $86 million, excluding profit-sharing costs and amortization related to the segment’s intangible assets. During the second quarter, SDI also recorded its 25% proportionate share of earnings from the operations of Recycle South as other income in the amount of $14.0 million.
Effective June 9, 2008, the company purchased the remaining 75% equity interest in Recycle South, a large metals recycling business now operating at 22 locations in North Carolina, South Carolina, and Georgia. After the closing, 100% of the financial results from Recycle South operations were included in the company’s scrap and scrap substitute segment earnings.
During June 2008, SDI also purchased certain assets of Sturgis Iron & Metal, Inc. for $42 million. Sturgis, a Michigan-based metals recycler, had filed for Chapter 11 bankruptcy protection in April 2008. None of the seven scrap yards that were purchased are currently operating. The following locations are expected to reopen in the third quarter under OmniSource management: Sturgis, Kalamazoo and Monroe, Mich.; South Bend and Peru, Ind.; and Fitzgerald, Ga.
For the second quarter, total ferrous scrap and substitute shipments, including shipments to SDI’s Steel Operations, were 1.6 million tons and non-ferrous scrap shipments were 254 million pounds. During the second quarter, the company’s scrap operations supplied 654,000 tons of ferrous scrap, or 44% of the tonnage purchased, by its steel operations.
The company’s Steel Fabrication Operations includes New Millennium Building Systems fabricating plants that produce joists, trusses, and steel decking used in the construction of non-residential buildings. Second quarter net sales were $93 million, or 3% of SDI’s second-quarter net sales. Operating income for this segment was $4 million ($58 per ton shipped), excluding profit-sharing costs. Second-quarter shipments totaled 76,000 tons at an average selling price of $1,227 per ton.
Outlook—“Our outlook continues to be very positive,” commented Busse. “We currently expect third-quarter results to be in a range of $1.05 to $1.15 per diluted share, similar in nature to the second quarter,” Busse said. “Third-quarter steel and scrap shipments could decline slightly as the result of seasonally planned mill outages and other consumer / provider industrial outages in July and August. Currently, though, order activity remains strong for steel products and metals recycling volumes are running at a record pace.
“Throughout 2008, we have modeled for a seasonally weaker fourth quarter, as is historically the case for the steel and metals recycling industries; however it is very difficult to have clarity concerning market conditions later in the year,” said Busse. “Even so, given our expectations for the third quarter and our current thoughts regarding the fourth quarter, we are now increasing our estimate for full-year 2008 diluted earnings per share to a range of $3.80 to $3.90, representing potential year-over-year annual growth of approximately 90%.
“Looking at industry fundamentals beyond 2008, we believe that the U.S. steel marketplace will remain attractive for domestic producers, as strong global steel demand continues; steelmaking resources and ocean freight costs remain high; and a weaker dollar remains,” said Busse. “We believe the U.S. steel industry is well positioned and globally competitive, and that these conditions are likely to persist. With many expansion projects already underway and others under consideration, Steel Dynamics expects to continue to be a strong participant in the growth and success of the American steel industry,” concluded Busse.
